Issuer officials who said Treasury's final issue price rules are a vast improvement over earlier proposals nevertheless raised concern that they might discourage competitive sales of bonds or create problems for issuers if underwriters run afoul of the rules.

GOP Spat Leaves Arizona Without Short-Term Credit Options

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DALLAS — After weathering one of the worst fiscal years in its history, Arizona starts the next one tomorrow without a short-term borrowing agreement.

In what has evolved into a political showdown, Treasurer Dean Martin is blaming Gov. Jan Brewer for allowing a $700 million line of credit agreement with Bank of America to lapse effective today. Also gone is the state’s ability to issue IOUs for state services, a form of internal borrowing.

“At this point right now, the state cannot borrow funds to meet cash flow needs,” Martin said. “There’s only sufficient cash for two months spending. Starting in September, the state is going to have serious cash-flow problems.”

Brewer, who faces Martin in the August Republican primary for governor, yesterday announced a new economic development strategy. No one from the governor’s office was available by press time to comment on the short-term borrowing issue.

The Republican governor failed to attend a meeting of the State Loan Commission earlier this month that was to have extended the lending agreement.

Brewer said she did not attend because she was in another meeting on SB 1070, a controversial new statute that requires local police and sheriff’s deputies to enforce immigration law.

The three-member Loan Commission includes Martin, Brewer and David Raber, director of the Department of Administration. Without Brewer, the commission could not vote on extending the agreement.

Martin wanted to end the lending agreement to force Brewer to cut spending rather than borrowing for operations.

“As a result of this meeting, I have essentially cut up the state’s credit cards,” Martin said. “The state will no longer be able to cover the checks the governor writes unless it has money in the bank. If she does, those checks will likely bounce.”

In the 2010 fiscal year ending today, the state has issued $86.5 million of Treasurer warrant notes to cover spending at an average interest rate of 0.93% and a total interest cost of $3.5 million, Martin said. The line of credit from Bank of America provided liquidity for the warrants, he said.

To cover a $1.5 billion deficit, Arizona mortgaged state buildings for $750 million through the issuance of certificates of participation in January and issued $490 million of revenue bonds backed by state lottery revenues last month.

But Martin said the proceeds of those deals will be gone when the state provides five months of payments to the public schools in a period of 60 days.

“That blows through all the cash the state raised through selling state buildings and issuing the lottery bonds,” he said.

This fiscal year was the first in Arizona’s history in which the state used outside lending to cover operating costs, Martin said.

It was also the first time since the Great Depression that the state has issued warrants.

Martin said that there is now no chance that the agreement with Bank of America or internal borrowing will be renewed.